5 Best Chinese Stocks: Tech Crackdown, Covid Fears Return

Hundreds of Chinese companies are listed on U.S. markets. But which are the best Chinese stocks to buy or watch right now? Among the best are Alibaba Group (BABA), Baidu (BIDU), Li Auto (LI), Xpeng (XPEV) and BYD Co. (BYDDF).

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China is the world’s most-populous nation and the second-largest economy, with a booming urban middle class and amazing entrepreneurial activity. Dozens of Chinese stocks are often among the top performers at any given time, across an array of sectors.

Stimulus Hopes

China is considering letting local governments sell up to $220 billion in bonds for infrastructure spending, Bloomberg reported on July 7. The news lifted Chinese stocks, as well as commodities and equities worldwide.

Meanwhile, China’s Commerce Ministry and 16 other departments jointly issued a notice on July 7 that supports new energy vehicle (NEV) buys and will consider extending the NEV purchase tax exemption past year-end. That follows similar signals from a high-level meeting on June 22.

On July 14, the state-owned Economic Daily said China needs further policies to promote new energy vehicles (all-electric, plug-in hybrid and fuel cell vehicles). That could be good news for Li Auto, BYD, Tesla and more.

Covid Restrictions Continue

Shanghai essentially ended its lockdowns on June 1. But with a “zero Covid” policy and less-than-stellar vaccines, restrictions continue, with new shutdowns a constant risk.

Shanghai has imposed significant restrictions in recent days.

Meanwhile, Macau has shut casinos and most other businesses in a bid to stop Covid spread.

China Crackdowns

China in recent weeks has suggested that a broad crackdown on internet platforms will finally be easing. However, Beijing has given similar signals over the past year, only to intensify strict measures, oversight and penalties.

On July 10, China regulators fined Alibaba, Tencent, SoftBank and several other companies for failing to disclose certain takeovers. The 500,000 yuan ($74,000) fines are nominal, but could unnerve investors.

In late July, China fined ride-hailing giant $1.2 billion, but that raised hopes that long saga was over.

Best Chinese Stocks Across Many Industries

As the world’s largest internet market, it’s no surprise to see big growth from China stocks focusing on e-commerce, messaging or mobile gaming. Notable Chinese internet stocks include:

In electric vehicles, several Chinese companies are becoming serious rivals to Tesla (TSLA) in the world’s biggest auto market.

Several Chinese financial firms or brokerages are listed in the U.S.

• Futu Holdings (FUTU)
• Up Fintech Holding (TIGR)
• 360 DigiTech (QFIN)
• Noah Holdings (NOAH)

Several China stocks are in solar power.

• Daqo New Energy (DQ)
• JinkoSolar (JKS)

For-profit education Chinese stocks are a notable nontech sector.

• New Oriental Education (EDU)
• TAL Education (TAL)
• 17 Education & Technology Group (YQ)
• Gaotu Techedu (GOTU), formerly known as GSX Techedu.

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China Stock Investing Via ETFs

One way to minimize individual China stock risks is via ETFs. Another advantage of buying ETFs is that a growing number of Chinese companies are listing in Hong Kong or Shanghai, instead of or in addition to the U.S.

KraneShares CSI China Internet ETF (KWEB) tracks major Chinese internet companies. Many Chinese stock holdings in the KWEB ETF are U.S. listed or traded, such as Alibaba stock, JD.com, Tencent, Pinduoduo and Bilibili, but KWEB also holds companies listed on Chinese markets. Direxion Daily FTSE China Bull (YINN) is a three-times-leveraged ETF of the 50 largest companies listed in Hong Kong, including Alibaba, JD.com and Tencent stock, but its biggest weights are in financials. (The Direxion Daily FTSE China Bear (YANN) is a three-times-leveraged ETF shorting Hong Kong’s biggest companies.)

Stock Market Trend Key

As always, investors should be following the overall stock market trend, adding exposure in confirmed uptrends and paring exposure or going fully to cash in corrections or bear markets. Right now the stock market is in a confirmed uptrend, but the rally is “under pressure.” More broadly, the market has been in a steep downtrend in 2022.

Join IBD experts as they analyze actionable stocks in the stock market rally on IBD Live.

Best China Stocks To Buy: Key Ingredients

Focus on the best stocks to buy and watch, not just any Chinese company.

IBD’s CAN SLIM Investing System has a proven track record of significantly outperforming the S&P 500. Outdoing this industry benchmark is key to generating exceptional returns over the long term.

Look for companies that have new, game-changing products and services. Invest in stocks with recent quarterly and annual earnings growth of at least 25%.

Start with companies with strong earnings growth, such as Pinduoduo. If they’re not profitable, at least look for rapid revenue growth as with Xpeng. The best China stocks should have strong technicals, including superior price performance over time. But we’ll be highlighting stocks that are near proper buy points from bullish bases or rebounds from key levels.

Chinese stocks started to outperform in the spring, but have struggled more lately.

Why This IBD Tool Simplifies The Search For Top Stocks

Best Chinese Stocks To Buy Or Watch

So let’s analyze these five top China stocks: Li Auto stock, NetEase stock, BYD stock, Xpeng stock and JD.com stock.

Li Auto Stock

Li Auto is one of several Chinese electric-vehicle makers that trade in the U.S., competing with each other and Tesla (TSLA).

The automaker delivered 13,024 Li One hybrid SUVs in June, up 13.3% from 11,496 vehicles in May and up 68.9% vs. a year earlier. That was the highest monthly sales since last December.

Q2 deliveries were 28,687, up 63.2% vs. a year earlier, but down 9.55% from Q1. Still, that was well above Li Auto’s prior target range of 21,000-24,000 units.

The more-upscale L9 hybrid SUV will begin deliveries in late August, with Li Auto predicting 10,000 deliveries in September.

Shares sold off hard in March to their lowest levels since last May. Li stock bounced following Q1 earnings on May 10. Shares reclaimed their 50-day line in late May. LI stock recently gapped above its 200-day line and then kept running.

On the heels of the L9 reveal and new EV subsidy signals, Li Auto stock ultimately more than doubled to a 52-week high of 41.49 on June 24.

Shares have consolidated since then. LI stock bounced from its 21-day line on July 13, offering an aggressive entry. But shares have tumbled below the 21-day line and recent lows, diving 10.6% in the week ended July 22.

At this point, investors should wait for Li Auto to form a new base, perhaps by early August. That would also let moving averages catch up.

The automaker has a dual listing on the Hong Kong exchange.

Li stock has a 90 IBD Composite Rating out of a best-possible 99.

Bottom line: Li Auto stock is not a buy.

Baidu Stock

Baidu is China’s top search giant. It also has big ambitions in the autonomous driving space. Earnings fell in 2021 and are expected to decline this year before rebounding in 2023.

Shares hit a two-year low in May, but have roared back.

BIDU stock has been trading above its 200-day moving average for the past couple of weeks. If you look at Baidu stock from its mid-February peak as the start of a new consolidations, investors could use 156.87 — just above the June 28 high — as a handle buy point just above the 200-day line.

But there is still a lot of overhead resistance.

Shares fell July 11 with other China internets, dropping below the 200-day line. Baidu stock found support July 15 at its 50-day line. BIDU is trading between its 50-day and 200-day lines.

Bottom line: Baidu stock is not a buy.

BYD Stock

BYD is the biggest Chinese EV maker, arguably the biggest EV maker in the world. It makes electric cars and buses and many hybrids. It’s also a major EV battery maker. Warren Buffett’s Berkshire Hathaway (BRKB) is a longtime investor.

Notably, BYD is profitable, though it was subdued in 2021 as capital spending surged to power the company’s ongoing expansion.

On July 14, BYD said it expects to report first-half net profit up 139%-207% vs. a year earlier in local currency terms 2.8 billion-3.6 billion yuan ($533 million). Excluding non-recurring gains and losses, profit should soar 578%-795%.

BYD reported first-quarter net income jumped 241% to 808.4 million yuan ($123 million) vs. a year earlier. Revenue rose 63% in local currency terms.

On July 3, BYD reported June NEV sales of 134,036, up 224% vs. a year earlier and nearly 17% above May’s 114,943. It sold 133,762 passenger NEVs in June, including 69,544 EVs and 64,218 PHEVs.

Q2 sales surged to 355,021 NEVs, booming 256% vs. Q2 2021 and 24% above Q1’s 286,329.  BYD roared past Tesla in terms of vehicle sales last quarter — by 100,000. Tesla still leads in all-electric vehicles, with BYD selling 180,296 passenger EVs in Q2.

As of the end of March, BYD ended production of its traditional gas-powered cars.

BYD largely avoided production hiccups amid China’s Covid lockdowns, helped by its in-house battery and chip operations.

The automaker has conservatively targeted 1.5 million in unit sales this year, or up to 2 million if supply constraints ease.

BYD’s sixth auto plant began rolling vehicles off the production line on June 30.

Deliveries of the BYD Seal, a Model 3 rival are expected to start by the end of July. Seal preorders had topped more than 110,000 by late June.

Like Nio and Xpeng, BYD began selling some EVs in Norway in late 2021. On July 5, it announced plans to enter the Netherlands, but didn’t say when sales might begin.

The China EV giant will unveil a high-end brand in the third quarter and roll out its first model in the fourth quarter. The brand will target the luxury market for 800,000 ($119,520) to 1.5 million yuan vehicles, starting with an off-road SUV.

BYD’s 90%-owned Danza unit has just launched a minivan in the affordable luxury space, with deliveries starting in August A Danza SUV will be unveiled soon. Mercedes-Benz owns 10% of Danza.

On June 8, a BYD executive said the company will supply batteries to Tesla, after months of speculation.

Toyota reportedly will make a small EV car for the China market in late 2022, using BYD Blade batteries. BYD may play a big role in Toyota’s broader EV push in the coming years.

Stocks hit a multimonth low on March 14 but rebounded powerfully. BYD stock broke out past a 39.81 buy point on June 27.

BYD stock dived 11% on July 12 on rumors that Warren Buffett’s Berkshire Hathaway (BRKB), a longtime investor, was selling some of its stake. The automaker said it had no information on any such sale, and there is no confirmation yet.

BYD stock found support at its 200-day line on July 13 and surged July 14 after the EV maker gave preliminary first-half earnings figures.

But shares have fallen back below their 50-day line. A new consolidation could form, but that will take a few more weeks at least.

The 39.81 buy point is no longer valid.

BYD is listed in Hong Kong and trades over the counter in the U.S. The BYDDF stock chart is prone to lots of little gaps up and down.

Cathie Wood’s Ark Invest has a small stake in BYD.

Bottom line: BYD stock is not a buy.

Tesla Vs. BYD: China Rival Seizing EV Crown

Xpeng Stock

Xpeng makes the G3 small SUV, the P7 sedan and the smaller P5 sedan. Preorders for its premium five-seat G9 SUV will start in August, with deliveries beginning in September.

The EV maker has now opened P5 reservations in Norway, Denmark, Sweden and the Netherlands. It already sells some G3 SUVs and P7 sedans in Norway.

Xpeng reported an in-line first-quarter loss, with revenue up 153%.

Xpeng delivered 15,295 vehicles in June, up 51.1% from May and 133% vs. a year earlier. It was the best monthly sales since December. XPeng delivered 34,422 units in Q2, above its previous range of 31,000 to 34,000 units. That was just below Q1’s 34,561.

Xpeng reportedly is undergoing an executive shakeup that signals a reined-in approach to European expansion, amid lackluster sales and overall limited production. The automaker also appears to be shifting toward higher-end EVs vs. mass-market vehicles.

Separately, Xpeng’s robotics arm raised $100 million in funding in early July.

Shares in March skidded to their worst levels since late 2020, not far from all-time lows. XPEV stock nearly doubled since then, racing above the 50-day line and almost back to its 200-day. Shares have pulled back below the 200-day and 50-day lines.

Bottom line: Xpeng stock is not a buy.

Alibaba Stock

Alibaba is China’s largest e-commerce player, with a growing cloud-computing business.

It’s profitable, though earnings fell in the March-ended fiscal 2022 and are expected to decline in the current fiscal 2023.

Alibaba and its financial affiliate Ant Group came under fire from Beijing in late 2020, kicking off a massive government crackdown vs. internet platforms and data-heavy firms.

BABA stock plunged from late 2020 to March 2022. Shares picked up steam in late May, as China moved toward ending Covid lockdowns.

Alibaba stock on July 7 moved above its 200-day moving average. It’s also arguably cleared a bottoming base, with resistance just above 121 over the past month. Almost all of the bottoming base formed below the 200-day, however.

BABA stock just dipped below its 200-day line and the 121 level on July 9.

Shares tumbled on July 11, plunging to below its 21-day line, following China’s latest fine vs. Alibaba. Shares are now testing support at the 50-day line.

BABA stock has fallen below its 50-day line.

Bottom line: Alibaba stock is not a buy.

Please follow Ed Carson on Twitter at @IBD_ECarson for stock market updates and more.

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